The Dow was lifted to a new high by 10% of its components and those were JNJ, MCD and UNH.

Market Statistics

Normally you would like to have more than 10% of stocks in an index participating when that index makes a new high. UNH, JNJ and MCD gained a total of 6.65 points and that equates to about 49 Dow points. The index made a new high but only gained +26 points. That is hardly a bull market rally.

Europe and Asia posted mostly declines and that carried over into the U.S. market. The German ZEW poll on investor confidence fell from +19.2 in June to -6.8 in July compared to consensus estimates for +9. That is the lowest reading since the Financial Crisis. Clearly, the Brexit vote crashed the survey but that is the new reality. Investors are very concerned about how the Brexit will impact Germany and the EU. The broader EU Consumer Confidence data is due out on Wednesday and it is expected to be significantly lower. This weighed on the European markets.

There was only one economic report in the U.S. today. The New Residential Construction for June rose to 1.189 million starts, up from 1.164 million in May for a 4.8% increase. Single family starts rose from 745,000 to 778,000 and multifamily rose from 390,000 to 411,000.

Permits also rose from 1,136 million to 1.153 million. Single-family rose +7,000 to 738,000 and multifamily rose 10,000 to 415,000.

However, the gains were not enough to lift the sector out of its lethargic rut it has been stock in over the last year. Starts have topped out below 1.2 million since April 2015. There is a mild uptrend but it is very lackluster.

The economic calendar for Wednesday is blank except for the weekly mortgage applications and the EIA oil inventories. Thursday's Philly Fed Manufacturing Survey remains the most important report for the week.

Tuesday was all about earnings and there were some high profile events. Goldman Sachs was the big winner with earnings of $3.72 that beat estimates for $3.00. Revenue of $7.93 billion also beat estimates for $7.58 billion. However, despite the good earnings, shares declined nearly $2. Second quarter compensation declined -13% to $3.33 billion and operating expenses fell -26% to $5.47 billion. Equity trading was only $1.75 billion and below Q1 at $1.78 billion and under estimates for $1.79 billion.

Goldman's beat was almost entirely on cost cutting, which is always good, but investors were hoping for better growth rather than more cost cuts. You cannot cut costs forever. They did see a strong uptick in bond trading as investors fled to safety.

UnitedHealth (UNH) earnings rose from $1.64 to $1.96 per share. Revenue rose from $36.36 billion to $46.49 billion. Analysts were expecting $1.89 and $45.04 billion. Revenues rose 28% for UnitedHealthcare and 52% for the Optum health science unit. They narrowed the full year outlook to $7.80-$7.95 per share. UnitedHealth booked $200 million in losses under Obamacare because of higher than expected services given to sicker individuals. For the full year the company expects to lose $850 million, up from $475 million in 2015. At the end of the 2016 cycle the company plans to exit most of the 24 states where is sells on the exchanges to roughly 750,000 members. They are going to sell the Nevada, New York and Virginia business. "We do not expect any meaningful exposure to Obamacare in 2017."

Shares rallied $1.84 to help lift the Dow to a new record.

Johnson & Johnson (JNJ) reported earnings of $1.74 compared to estimates for $1.68. Revenue of $18.5 billion also beat estimates for $17.97 billion. They guided for the full year to $6.63-$6.73 and $71.5-$72.2 billion. Analysts were expecting $6.61 and $71.72 billion.

Global consumer sales declined -1.8%. Domestic sales increases 2.1% but international sales fell -4.4% because of a 5.4% hit on currency issues. JNJ shares rallied $2.11 to help lift the Dow to a record.

Phillip Morris (PM) reported earnings of $1.15 that was below the $1.21 in the year ago quarter. Analysts were expecting $1.20. Revenue of $6.65 billion also missed estimates for $6.77 billion. The company said the miss wa caused by increasing sales in low margin geographies. The company reitereted full year guidance for $4.45 to $4.55. Shares fell -$3.11 on the news.

Lockheed Martin (LMT) reported earnings of $3.32 on revenue of $12.9 billion. Analsyts were expecting $2.93 on revenue of $12.55 billion. They raised full year guidance from $11.50-$11.80 to $12.15-$12.45. Revenue forecasts were raised from $49.6-$51.1 billion to $50.0-$51.5 billion. The company said deliveries of the F35 fighter were accelerating and the outlook for future years was strong. Shares spiked to $2.63 on the news and pulled back to close at $2.59 for a decent $2.67 gain.

After the bell, Microsoft (MSFT) reported earnings of 69 cents that beat estimates for 58 cents. Revenue of $22.64 billion also beat estimates for $22.1 billion. Revenue for the Azure cloud service rose 102% in the quarter and usage more than doubled. Total cloud revenue rose 7% to $6.7 billion. The Office365 cloud product saw revenue rise 54%. Revenue from the personal computing segment declined -4% to $8.9 billion because of a 79% decline in phone revenue. Shares rallied $2 in afterhours to $55.30.

Despite a 32% decline in fuel costs, United Airlines (UAL) reported a 51% decline in earnings to $2.61, which still beat estimates for $2.56. Revenue fell -5.2% to $9.4 billion and barely beating the $9.39 analyst estimates. The company announced plans for a $2 billion stock buyback. Shares were flat in afterhours.

Intuitive Surgical (ISRG) reported earnings that rose 23% to $5.62 on a 15% rise in revenue to $670 million. Analysts were expecting $4.97 and %640.7 million. They sold 130 Da Vinci systems at $1.5 million compared to 110 systems in Q1 and 118 in the year ago quarter. Shares spiked $46 to $717 in afterhours.

The headline earnings for Wednesday are EBAY, FFIV, INTC, QCOM and AXP.

F5 Networks reports earnings on Wednesday but they were up strongly today on acquisition rumors. In early June, they reported they had retained Goldman Sachs to review some acquisition offers. The news has been very quiet since that June announcement and shares have been volatile. I speculated a week or so ago that we could get some news with earnings on Wednesday. On Tuesday it was rumored that private Equity firm Thoma Bravo might be a buyer. The company acquired Qlik Technologies earlier this year. The New York Post broke the news the PE firm was also interested in F5. Citigroup speculated in a June 7th report that HPE, Dell, EMC and Cisco could also be interested. We could have a significant bidding war if all those parties decide to make an offer.

The Dollar Index soared to a four-month high on the drop in the ZEW Investor Sentiment report and better than expected housing starts. The spike in the dollar weighed on commodities including oil, which fell to $44.59 on its way to $43 or even lower. The strong dollar is going to make Q3 earnings are challenge and could push estimates back into negative territory from their current +0.6% estimate.

The API inventory report showed a -2.3 million barrel drop in crude levels but gasoline inventories rose 800,000 barrels. This pressured prices after the close.


Bank of America Merrill Lynch said cash levels held by fund managers hit 5.8% in the latest fund survey. That is the highest level since November 2001. Equity hedging is at the highest level in the survey's history. The S&P has rallied nearly 9% since the post Brexit low but managers continue to hoard cash.

The bank said with $12 trillion in negative yield debt in the global markets investors are worried financial conditions are tightening. The Fed is not expected to make a move until 2017. "A record number of investors are saying fiscal policy is too restrictive and the first underweighting of equities in four years suggest that fiscal easing could be a tactical catalyst for risk assets going forward" according to BAML. More than 39% of fund managers believe helicopter money will become a reality compared to 27% in June. That means they believe there is more QE ahead. Source

The S&P and the majority of the indexes have been moving sideways in a very narrow range for the last four days and today that range began to fade. The S&P 400 Midcap Index ($MID) shows the trend the best. Every index except for the Nasdaq has this pattern. This suggests the "consolidation in place" we have been seeing for the last several days may have run its course and we could be looking at a future decline even if it is just temporary.

Volume has been weak at 5.6 billion shares on both days this week. There is definitely a lack of conviction on both sides.

The S&P has stalled at 2,168 since the opening gap on Thursday. It has been trading in roughly a 10 point intraday range but posting end of day moves of 1-5 points. The S&P and the rest of the markets are seriously overbought from the post Brexit rebound and they need a decent dip to give cautious investors something to buy. Nobody wants to buy a top that has lasted for five days. It is like watching a firework smoke for five minutes but you are afraid of getting your hand blown off if you pick it up and try to light it again. Investors are afraid to buy the top and get their account blown up if a sudden decline appears.

The Dow actually made a new high with a 20-point spurt right at the close thanks to those three stocks I mentioned earlier. That lifted it up to just over the top of the range but not enough to really call it a breakout. With multiple Dow components reporting earnings on Wednesday, the index could go in either direction.

The Nasdaq is struggling at a much lower level to the Dow and S&P. The index finally punched through the 5,000 level but immediately stalled. The biotech sector is dragging on it again and Netflix was also an anchor on Tuesday. The Nasdaq is also overbought but only at a lower level.

The Russell 2000 pushed through resistance at 1,205 but immediately came to a dead stop at 1,210 and has fallen back from that level after five days with no progress. If the small caps are going to roll over it could drag the rest of the market lower.

I am looking for a dip for a trading buy but I suggest it be a passive buy rather than a back up the truck event. August and September are seasonally the two weakest months of the year and the end of July normally fades into that weakness. The influx of cash from Europe is supporting the market but it will not last forever. The Bank of America news on rising cash positions and active hedging by funds shows there is a lot of negative sentiment in the market. On a contrarian basis that is great because it will fuel a monster rally once the market really turns higher. I am just not convinced we are there yet. There are too many political headlines and possibly some economic ones to allow a monster rally before the elections. I could be wrong but I would rather be in cash and be wrong than be fully invested and be wrong about direction.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now